Life Insurance and Your Payout Options
Death benefit options for heirs.
When a loved one dies, those closest to the person may be covered by a life insurance policy. Term life insurance is typically taken about by people who have young children with whole life insurance for those who bought a policy many years ago and are keeping it for their old age.
If you are a beneficiary of a life insurance policy, the insurance company will look to settle with you and anyone else named. You’ll need to file an insurance claim to get the money you have coming to you, with more than one way to get that death benefit:
1. Lump sum — You are entitled to receive the entire death or survivor benefit in a lump sum, an ideal distribution for anyone who needs to pay off funeral related expenses and other costs. This option allows you to pay off debt and invest the remaining funds. A lump sum distribution is the most popular option of all.
2. Structured settlement — Sometimes, beneficiaries prefer not to receive all the death benefit at once. Instead of a lump sum, installment payments can be made each month until the funds are depleted. Under this option, the insurer keeps the money invested and distributes the funds per an agreed upon arrangement.
3. Life income — For some survivors, receiving income for life is their best option. Under this arrangement, the insurer uses an actuarial table to determine your lifespan and then calculates what your payment will be each month for the rest of your life. If you die young, then the remaining funds go to your heirs. Yes, there is a chance that you could outlive your benefit, therefore make sure you have another income source for your later years.
4. Interest pay out — A beneficiary may decide that the funds do not need to be paid out until later in life. This option may be useful for child beneficiaries who need to reach a certain age before receiving the death benefit. In the meantime, the insurance company will invest these funds and make monthly or quarterly interest payments until the policy is paid out in full.
If you are not certain what option you want to take, check with your financial advisor. Typically, you can change the pay out rules later on, but it is easier to develop a plan now and stick with that.